Wonderland's (and DeFi's) Anonymity Problem

DeFi (and the Canadian crypto community, especially) woke up yesterday to a beauteous unspeakable headline. We learned that “Sifu,” who goes by the grip @OxSifu, a halfway subordinate and CFO of DeFi protocol Wonderland, was Michael Patryn (also known sometimes arsenic Omar Dhanani), an evident co-founder of failed, infamous (to enactment it lightly) Canadian speech QuadrigaCX.

This find was arsenic shocking to me. As a young upstart successful Canadian crypto circles successful 2010, I was exposed to Patryn, an acquisition I was quoted connected successful an investigative piece successful Vanity Fair successful 2019. Following yesterday's news, wherever an anonymous squad subordinate of a starring DeFi protocol was outed arsenic a vocation criminal, I find myself reasoning profoundly connected the taxable of anonymity, reputation, and spot successful DeFi, an manufacture wherever truthful overmuch unsighted religion is enactment into one's idiosyncratic history, motives, and ideals.

Joseph Weinberg was an aboriginal capitalist successful Bitcoin successful 2010 and manager astatine Coinsetter until its acquisition by Kraken successful 2016. Currently, Weinberg is the co-founder of Shyft Network, the blockchain-based spot web that reclaims trust, credibility and identity. This nonfiction is portion of CoinDesk's Privacy Week series.

As idiosyncratic who was determination for Canadian crypto’s aboriginal days, I tin archer you that we were operating genuinely successful the chartless successful those archetypal years. In that environment, actors emerged that contiguous our abstraction wouldn’t tolerate. I won’t talk oregon uncover much connected Michael/Omar for idiosyncratic information reasons, but the constituent isn’t astir him; it's astir the motivation compass we indispensable request and a request to combat for the betterment of our ecosystem – and humanity.

Is full anonymity applicable successful a abstraction wherever atrocious actors inevitably exist? When we deanonymize founders, does DeFi adoption suffer? How bash we determination guardant erstwhile situations similar Wonderland bring backmost memories of what we've fought truthful hard to alteration since 2013? These are each questions I'm asking myself close now. Below, I besides privation to stock what I deliberation could go immoderate answers – and a way guardant for improving spot successful DeFi.

I'm not going to reason against anonymity successful DeFi, but alternatively stock immoderate ways successful which pseudo-anonymity – and estimation – tin support against atrocious actors similar Patryn being fixed the keys to users' funds. While Quadriga was a centralized speech (sole ownership), Wonderland’s treasury is inactive successful the hands of halfway cardinal signers – a concern of pseudo-custody, wherever hazard becomes a factor. Smart contracts whitethorn beryllium self-executing, but individuals controlling funds are autarkic actors.

It's present wherever quality involution becomes an issue. The assemblage puts its religion successful the thought that those successful interaction with their wealth volition bash the close thing. Most of the time, it works. Until it doesn't. Would you privation to put successful a task with Chef Nomi of SushiSwap, the infamous co-founder who abruptly liquidated his holdings and caused the token to crash?

Anonymous teams are not taxable to inheritance checks, recognition checks, oregon a assortment of information checks that guarantee individuals don't person transgression records oregon are connected sanctioned ticker lists. As DeFi grows and the ecosystem seeks organization adoption and a wider acceptable of marketplace participants, with large powerfulness comes large responsibility.

In Bitcoin and Ethereum, wherever automatic regularisation enforcement is based connected consensus, individuals themselves don't substance arsenic overmuch – they don't person the other abilities to bash thing bad.

It's nary surprise, therefore, that caller guidance from the Financial Action Task Force (FATF) focused truthful overmuch connected DeFi. FATF made the statement that cardinal signers are successful power of funds, fundamentally making them regulated entities, whereas decentralized autonomous organizations (DAOs) tin (and astir apt will) beryllium categorized arsenic virtual plus work providers (VASPs) to immoderate grade implicit the coming years.

This guidance was intentionally near open-ended and wide truthful regulators tin take however they attack these topics. If we let atrocious actors to clasp powerfulness successful DeFi protocols anonymously, increasing regularisation would rise galore reddish flags and taint plus pools and organization confidence.

What we indispensable bash arsenic a assemblage is deliberation done immoderate of these issues on the lines of societal estimation and trust. We cognize radical are not keen connected giving up their identities, and we are present warring for state and openness aft all. Instead, again, we enactment religion successful people. In the lawsuit of Patryn, that's what happened. We fto caller actions talk louder than wide reputation. This is simply a nonaccomplishment of spot and our societal work arsenic an industry.

The aboriginal I would similar to spot for DeFi, and the roadworthy toward wide adoption of Institutional DeFi, would regenerate full anonymity with pseudo-anonymity based connected the powerfulness and inferior of attestations.

Pseudo-anonymity is the conception of revealing parts of oneself and partially disclosing accusation indispensable to people. On-chain, we tin attest to someone's inheritance grounds without ever knowing their names, revealing protected idiosyncratic accusation (PPI), oregon doxing someone. We tin "blindly" find who radical are and what they person done, and past uncover those answers to those who cognize them – each without giving up identity.

Crypto isn't forgiving. In a trustless ecosystem, the lone happening we person is the spot we make and the integrity we maintain. We indispensable integrate systems to summation assurance successful the anonymous. The irony of trustless systems is that the layers supra code-enforced execution necessitate trust. If DeFi continues to grow, we request to instrumentality a measurement backmost and inquire ourselves however we tin let it to prosecute interoperably with anonymous systems and people.

The committedness of DeFi is open, but I judge that the existent endgame is wherever we person a somewhat retrofitted world from what we are experiencing today. What makes DeFi magnificent to immoderate is presently starring to captious breakdowns successful the basal hazard requirements of the fiscal system: AML, information coordination, and reconciliation, layered preferential de-anonymity (pseudo-anonymity).

We tin each say, "But Satoshi believed," but again, this isn't bitcoin; it isn't the basal layer, and to accidental "anonymous-everything" is the other of what state is about: prime and tradeoffs. These systems let america to commencement anonymously and marque tradeoffs successful bid to optimize oregon alteration different services successful amended moving bid (i.e centralized exchanges). Bitcoin and the networks that came aft it, similar Ethereum, were not built foundationally to beryllium anonymous systems; they were designed to springiness america censorship-resistant transparency.

Don't get maine wrong: I anticipation to unrecorded successful a aboriginal wherever we are afloat anonymous, and everything is “privacy by design” – but until then, I'm moving with world arsenic a blend of the satellite we person grown up successful and the 1 we are creating.

The crypto abstraction was designed to springiness america each state of prime and a caller paradigm successful gathering options and levels of freedom. Those freedoms should beryllium ours to determine on, and each idiosyncratic successful our ecosystem contiguous already makes those tradeoff decisions each day.

To genuinely locomotion that walk, we request to recognize what different radical privation successful their toolbox of choices. Institutions, for example, privation to cognize who they are doing concern with; governments privation to cognize we are not laundering wealth oregon financing terrorists. Supporters of a DeFi task privation to cognize that it isn’t tied to idiosyncratic who has notoriously acted successful atrocious religion to guiltless radical who don’t merit it. I cognize individuals who were wounded by Quadriga, and aboriginal crypto radical similar myself knew to ne'er clasp assets determination due to the fact that of what we knew.

In DeFi and crypto, insider cognition and shadiness games shouldn’t beryllium what support radical harmless from atrocious actors anymore – that epoch of our abstraction has passed. Today, regulators are responding to people's actions arsenic a objection of next-generation innovation and the aboriginal you are building. We are each connected halfway signifier close now. We've travel truthful acold since the aboriginal days of the Wild Wild West, and the actions we instrumentality present volition everlastingly beryllium cemented successful the past books and rules created successful effect to our efforts.